development through partnership

1. development through partnership Infrastructure Delivery Management Toolkit: 2010 Edition Practice Guide 2: Construction Procurement Strategy

2. development through partnership Contents of this presentation • Introduction • Challenges in current construction procurement practice • Traditional approach to construction • Alternative delivery options • Alternative pricing strategies • Framework Agreements • Construction Procurement Strategy

3. development through partnership Challenges in the current construction practice • To name a few: • Too many projects • Few people to manage and monitor projects • Too many relationships to manage • Scarcity of professionals in the public service • Consultant driven • Low skill levels and poor quality • Building in contractor development and job creation objectives • Too little time • Long decision making processes – regulations & policies • Stop – start implementation • Political influences

4. Fundamental considerations in delivery cost Quantum - service delivery targets quality / performance delivery / time Bottom line – infrastructure delivery needs to meet expectations

5. Current capacity constraints • CIDB (2006) attributed the SA capacity constraints within government to deliver infrastructure to: • the project approach where for each and every project, consultants are appointed, briefed, directed and overseen by a gradually disappearing cadre of skilled staff • unbundling strategies aimed at reducing the size of contracts in order to target small or local enterprises which place increased demands on the client’s resources to manage and oversee these small contracts

6. CIDB proposal • CIDB inform practice note No 1: SCALING UP DELIVERY AND ACCELERATING EMPOWERMENT (August 2006) • In a nutshell • Use larger contracts • Use longer contracts • Adopt a programmatic and a systems approach • What this does is to: • 1) Reduce the work load of the SCM units • Reduce the number of relationships to a manageable level which frees up government’s capacity to brief service provides, manage contracts and to make payments • Allow skills to be rapidly replicated and certain tasks to be de-skilled • Improve job creation and SMME development outcomes

7. Search for alternative delivery models • Problem statement • Capacity constraints exist due to the continued use of an outdated delivery approach • Solution • Require a delivery model which: • matches the capabilities and capacities of the client to effectively oversee its implementation • takes account of the capabilities of the private sector • accommodates current socio-economic delivery imperatives CIDB / National Treasury IDMS 2010 Have in place well developed targeted procurement procedures to address this aspect of delivery

8. Traditional approach to construction • Procurement strategy for traditional approach to delivery • One project one contract (or a group of smaller contracts)  • Discipline specific consultants appointed on a percentage fee basis • Open tenders are called for when the design is complete • Contractors are contracted on a bills of quantities basis No need to consider procurement strategy – a one size fits all approach suffices

9. Traditional approach to construction Fee based on percentage of cost of construction – allows project to be developed as it unfolds Scope of work for consulting services contract Master Outline statement Procure consulting services Stage 1: Preparation Scope of work for construction work contract Stage 2: Definition Master –servant relationship Priced contract based on lump sums or bill of quantities Stage 3: Design Development Stage 4: Production information Procure construction works Servant

10. Traditional approach to construction John Smeaton in 1768 during the construction of the Clyde Canel (Scotland) established the master / servant between designers and contractors Sir Joseph Bazalgette’s standard form of contract for London’s major sewer projects and the embankments on the Thames 1860s was adopted by the Metropolitan Board of Works Institution of Civil Engineers’s standard form of contract published in 1945 based on the 1860 standard form of contract South African current traditional forms of contract based on ICE form of contract Are their different ways of delivery projects to improve outcomes?

11. Design by Employer Contract under which a contractor undertakes only construction on the basis of full designs issued by the employer. Suitable where: • The client wishes to make significant technical inputs into design process and design details. • The client requires flexibility in the development of the design. • The risks are to be balanced between the parties, or • Reasonable certainty in cost and time is required before a commitment to build is made. • Suitable client accepted production information is available to be incorporated into the scope of work for the contract.

12. Alternative allocation of design responsibilities

13. Alternative contracting strategies Design and construct contract Award works contract Scope of work based on concept report Note Contractor responsible for later design stages Consultant reviews contractor’s design against project brief

14. Design and Construct Contract in which a contractor designs a project based on a brief provided by the client and constructs it Suitable where the employer requires • Integrated design and construction and single point accountability • That most risks lie with the contractor in return for price certainty, or • The cost and completion date is almost guaranteed when a commitment to build is made. Suitable for simple and moderately complex projects, particularly where the client has limited technical capability. 

15. Alternative contract strategies Develop and construct contract Award works contract Scope of work based on design development report Note Contractor responsible for later design stages Consultant reviews contractor’s design against project brief

16. Develop and Construct Contract based on a scheme design prepared by the client under which a contractor produces drawings and constructs it. Suitable where the employer requires • Integrated detailed design and construction and single point accountability • Reasonable certainty in cost and time before a commitment to build is made. Suitable for simple and moderately complex projects

17. Alternative allocation of management responsibilities

18. Management Contract Contract under which contractor provides consultation during the design stage and is responsible for planning and managing all post contract activities and for the performance of the whole of the contract. Suitable where: • The employer has limited capability or capacity to advance the work beyond a strategic brief. • The employer retains most of the risks • The contractor needs to work alongside the design team to develop the programme for construction design and tender. Suitable for sophisticated projects, particularly where the client has limited technical capability.

19. Management contractor relationship Design consultant (professional service contract) Example Employer Management contractor Subcontractor (construction work sub contract) Subcontractor (construction work sub contract) Design consultant (professional service contract) Subcontractor (construction work sub contract) Management contractor subcontracts out the bulk of the work

20. Alternative contracting strategies Award works contract Managementcontractor Scope of work based on design strategic Alternative Alternative Alternative Note Contractor can be made responsible for all or some of the design and all construction

21. Construction Management Contract under which a contractor is responsible for planning and managing all post-contract activities and for the performance of the whole contract. Where it is desirable to • Have direct contracts with specialists trade contractors or small contractors, and • Manage the interfaces between interrelated packages within a project. • Suitable for projects where a number of trade contractors are appointed.

22. Alternative pricing strategies • Starting point • Tender prices can be built up by considering a number of components including: • General items: items to cover the charges for compliance with contractual obligations • Construction (work) content: price of constructing all the items that are to be constructed or built • Overheads: operating (every day) expenses incurred in the upkeep of the business and its offices that are not directly attributable to individual contracts • Risk allowance: an allowance (contingency) to cover the perceived risk associated with uncertainty • Profit

23. Bill of quantities Build up of tender price General item or Construction content – labour, materials, plant and equipment or Subcontracted work Overheads Risk allowance Profit • Bill of quantities • is useful only to develop a tender price for the contract • cannot be used to control costs on site

24. Bill of Quantities • Client takes the risk for changes • Contractor takes the risk of rate changes • Use where • a clear, unambiguous scope of works exists, which is complete save for uncertainty on the actual quantity of work to be done e.g. earthworks • Where little or no change to programme is envisaged • The level of risk is low and quantifiable

25. Pricing strategies: Activity schedule Break the scope of work down into activities related to a programme and price each activity as a lump sum Alternative pricing strategies

26. Activity schedule Build up of tender price General item or Construction content – labour, materials, plant and equipment or Subcontracted work Overheads Risk allowance Profit An Activity Schedule is a list of activities which represents the activities expected to be carried out The Contractor enters lump sum prices against each of these activities (Total = contract sum) Paid for completed activity

27. Lump sum • Contractor is : • at risk for costs associated with completing the contract • not compensated for any errors or omissions of his own

28. Price list Contractor is only paid amounts in Price List for priced work

29. Lump Sum, price list, activity schedule Price-based strategy • Contractor takes the risk for changes in quantities • Client takes risk of change of scope • Use where • A clear, unambiguous scope of work exists, which is complete in all respects and as such can be priced with certainty. • Changes to requirements are not anticipated

30. Bill of quantities vs other price-based pricing strategies The primary purpose of a bill of quantities is to arrive at a tender price within relatively short time frames so that a tender can be evaluated and a contract awarded The employer is liable for increases in the tender price arising from increases in quantities and mistakes in compiling the bill of quantities In lump sum, activity schedules and pricing list contractor is at risk as price is all inclusive

31. What about other pricing strategies? • Price based: • bill of quantities • activity schedule • lump sum • price list • Cost based: • cost reimbursable • target cost

32. Cost Reimbursable • Contract in which the contractor is paid for his actual expenditure plus a percentage or fee. • Use where an emergency exists • the scope of work cannot be priced ahead of the works • the employer cannot transfer the project risk to the contractor or the risk pricing is prohibitive • the contract is likely to be disrupted by uncontrollable events

33. Cost reimbursable contract Site overhead percentage Wages and salaries Fee includes profit and overheads + Materials at open market rates Fee + Equipment at agreed rates, market related rates or percentage up or down on a hire list Fee includes profit and overheads Fee Subcontract costs

34. Target cost contract Target Price (initial) Target Price (final) adjusted for compensation events Final “cost” Sharing of cost savings / overruns pain (share of cost overrun) gain (share of savings) payment to contractor (cost + fee) Scenario 1: Contractor gain Scenario 2: Contractor pain

35. Target Cost Pricing • Cost reimbursable contract in which a target cost is estimated and on completion of the works the difference between the target cost and the actual cost is apportioned between the employer and contractor on an agreed basis. • Use where: • The employer wishes to reward strong contractor performance, share financial risk or promote collaboration • An early contractor involvement is required to make inputs into the design process • Framework agreements are entered into

36. Target price contracts • Procurement of contractors • Option 1 (design is not sufficiently developed) • Tenderers tender cost parameters • Target price negotiated when sufficient information available to price the works • Option 2 (design is sufficiently developed to price) • Tenderers tender cost parameters • Assumptions are made about any uncertainties so that the tenderers can price the works (adjust target if assumptions turn out to be incorrect e.g. quantum of reinforcement) • Tenderer tenders a target price

37. Management contractor relationship Design consultant (professional service contract) Example Employer Management contractor Subcontractor (construction work sub contract) Subcontractor (construction work sub contract) Design consultant (professional service contract) Subcontractor (construction work sub contract) Management contractor subcontracts out the bulk of the work and is paid on a cost reimbursable basis i.e subcontract amount plus a fee + prices for work done by the contractor himself This allows cost to be controlled

38. Pricing strategies Activity schedule / lump sum Price List Bill of quantities Employer’s flexibility to effect change Target cost Cost reimbursable Employer’s risk Contractor’s risk

39. Benefits of Target Cost Pricing • Allows early contractor involvement • Facilitates collaborative / partnering / developmental relationships • Suitable for use in framework agreements because: • allows the employer to procure work on an as-instructed basis over a set term without necessarily committing to any quantum of work • offers flexibility in attaining secondary procurement objectives as requirements can be adjusted from one package order to another

40. Lean construction To provide higher value and less waste the fragmentation in design needs to be addressed, preferably before 25% of the design is complete Target cost contracts can enable this to happen even where a design by employer approach is adopted This allows a specialist in construction to be appointed at the same time as the design team Such a contractor may or may not be responsible for managing the design team

42. What is a framework agreement? ISO 10845-1, Construction procurement – Part 1: Processes, methods and procedures A framework agreement is an agreement between an employer and one or more contractors, the purpose of which is to establish the terms governing contracts to be awarded during a given period, in particular with regard to price and, where appropriate, the quantity envisaged Allows the employer to procure construction services to provide work packages on an as-instructed basis (call offs) over a set term without necessarily committing to any quantum of work

43. Current paradigm • Client appoints a professional team to design the works • Open tenders are called once the production information has been finalised by the professional team • (production information = final detailing, performance definition, specification, sizing and positioning of all systems and components) • Contractor prices the production information • Contractors are contracted on a bills of quantity basis for a single project (which may or may not include budgetary items to cover aspects of the works which have not been finalised)

44. Packages in a framework contract Hand over works Packages delivered over a term by a single contractor Scope works Concept Develop concept for works P #1 Construct works Design works Document works P #4 P #3 P #2 etc Package orders Procuring a service over a period of time

45. University of the Witwatersrand Package #1 Package #2 Start November 2009 Start January 2009 Undergraduate Science Centre– phase 1 (R178 m) Chamber of Mines – fourth quadrant (R70 m) Start October2010 Package #4 Package #3 Refurbishment of Chamber of Mines – (R45m) April 2010 Same contractor but different professional teams Wits Art Museum (R68m)

46. Principles of Framework Agreements • Framework agreements • are entered into following a competitive selection process • need to establish the following as a minimum: • - the basic terms of the contract • - the term of the contract (3 -4 years) • - the scope of the work which may form the basis of a package order • - the basis by which contractors are to be remunerated for instructed work • - the manner in which competition between framework contractors may take place

47. Essential elements of a framework • A package is works within the scope of work of a framework agreement which is instructed within a stated period of time (start and end date) • A package order is an instruction to carry out a task and may only be issued within the term of the agreement • A framework contract is only entered into with those who have the capability and capacity to carry out the likely work End date Start date Framework contract  End Start Start End Start End  Package orders Start End

48. Outcomes of Alternative Delivery Approaches FROM TO Collaboration towards shared goals Integration of design and construction Proactive, collaborative risk management and mitigation Long-term relationships focused on maximising efficiency & shared value Constructability and cost model developed with contractor’s insight Discipline of continuous budget control • Master-servant relationship of adversity • Fragmentation of design & construction • Allowing risks to take their course • Short-term “hit and run” relationships • Constructability & cost model determined by design team and consultant only • “pay as you go” delivery culture

49. Key question • Question: • How does one appoint a contractor in the absence of a scope of work? • Answer: • Look at: • cost based pricing strategies as apposed to price based strategies • rates based contracts (where P and G costs are fairly constant and work is very straightforward)

50. Pricing strategies for framework contracts A framework agreement is a contract where the terms of payment are agreed in the absence of a detailed scope of work Pricing strategies Lump sum Bills of quantities Activity schedule Price list Cost reimbursable Target cost Not suitable –require scope of work to price the work Possibly in simple works but need to deal with costs associated with different sites Yes – if linked to a management contractor Suitable – as cost parameters can be pre-agreed and target can be initially tendered and thereafter negotiated